Thursday, April 25, 2013

Court-determined FRAND rate for Motorola's standard-essential patents is a blow to Google

The United States District Court for the Western District of Washington has now, after the court and the parties reached an agreement on redactions of confidential business information, published the FRAND rate determination made last Friday, setting the royalties Google's Motorola Mobility can reasonably charge Microsoft for the use of Google's standard-essential patents (SEPs) in Microsoft's implementations of certain standards (the H.264 video codec standard and the IEEE 802.11 WiFi standard). This is a historic decision by Judge James L. Robart, the federal judge presiding over this contract litigation. No U.S. court has previously made a FRAND royalty determination at the request of an implementer of a standard (as opposed to a run-of-the-mill damages award for past infringement). We will now see many more FRAND determinations in the years ahead, also due to the proposed FTC-Google antitrust settlement.

The bottom line is that Motorola will get a few cents per unit of Microsoft products implementing the standards in question, resulting in a total annual amount of maybe a couple million dollars as opposed to the $4 billion annual payment Motorola originally demanded and defended last year as being "in fact reasonable [F]RAND]". The court set a range and a point. The range is needed to determine whether Motorola's initial royalty demand was reasonable and non-discriminatory. The point is what Microsoft will pay under the license Google's Motorola now has to extend. These are the per-unit amounts the court arrived at:

H.264 patents: The range is 0.555 cents ($.00555) per unit to 16.389 cents ($.16389) per unit. The lower bound (half a cent per unit) is what Microsoft will have to pay, as the court found that "Motorola did not demosntrate that its H.264 SEP portfolio provided significant technological value to Microsoft's products". Dozens of major H.264 patent holders make their patents available through the MPEG LA AVC/H.264 pool at similar rates, which the court considered, besides the fact that Google as an MPEG LA licensee agreed to reciprocity, "an indicator of a [F]RAND royalty rate". The court also found that Microsoft is an intended third-party beneficiary of a grant-back obligation in Google's license agreement with MPEG LA.

IEEE 802.1 patents: The per-Xbox royalty will be 3.471 cents ($.03471) per unit for the Xbox and 0.8 cents ($.008) per unit for all other Microsoft products using the standard; the range is 0.8 cents ($.008) to 19.5 cents ($.195) per unit. A Via Licensing pool of IEEE 802.11 SEPs was considered less successful than MPEG LA's AVC/H.264 pool but its rates were still found to be reasonably indicative of a FRAND rate for patents reading on this standard.

In terms of what Google can expect to get per year, it appears that these per-unit rates correspond to an annual payment of less than $1.8 million -- again, Motorola originally wanted $4 billion. Microsoft's position at the trial was that Motorola can ask for approximately $1.2 million a year. The court's determination is 50% higher than that one, but less than a 20th of a percent of Motorola's initial demand.

This FRAND rate determination is a strategic win for Microsoft in its wider patent dispute and a strong indication that Google way overpaid for Motorola. I'll just reiterate what I wrote on Wednesday:

$12,500,000,000 certainly has a lot of zeroes, but $12,500,000,000 is a high price for a lot of zeroes. Zero enforceable injunctions against Microsoft in Germany. Zero enforceable injunctions against Apple in Germany if, as I predict, the push injunction against Apple is now lifted. Zero U.S. import bans (on Monday the ITC just tossed the sole remaining patent-in-suit in Motorola's case against Apple, and Google faces a high hurdle in its attempt to salvage its case against Microsoft after an Administrative Law Judge recommended its dismissal a month ago). Zero offensive wins in U.S. federal court.

The FRAND rate Judge Robart has set is not zero, technically speaking. But it's a whole lot closer to zero than to what Google's Motorola demanded (and to what Google paid for this patent portfolio).

Google may not have thought the deal through because it just wanted patents, desperately, after its losing bid for Nortel's far more valuable portfolio. Google was probably misguided by the number of patents the acquisition target held instead of understanding their very limited value. Last year an ITC judge already found that "Motorola was not interested in good faith negotiations and in extending a [F]RAND license" to Microsoft, but didn't say what Motorola is actually entitled to in light of its FRAND licensing obligation (the ITC doesn't make FRAND determinations and resolve contract disputes). Judge Robart has performed this complicated task. His findings of fact and conclusions of law are 207 pages long and contain some very sophisticated calculations. All the facts were on the table, and the result is that SEPs are not the answer to Android's patent infringement issues. Nor are Motorola's non-SEPs, which haven't given Google any serious leverage either.

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About Me

Florian Mueller used to be an award-winning intellectual property activist. His 30 years of software industry expertise span different market segments (games, education, productivity and infrastructure software), diverse business models, and technical and commercial areas of responsibility. In recent years, Florian advised a diversity of clients on the patent wars surrounding mobile devices, and on their economic and technical implications. (In order to avoid conflicts of interest, Florian does not hold or initiate transactions in any technology stocks or derivatives thereof, except that he is long AAPL.) He is now developing games for smartphones and tablet computers.